Bernanke's Exit Strategy: Not Likely Any Time Soon

Chairman Bernanke delivered a rather pedantic presentation Thursday evening on the Federal Reserve balance sheet.

He discussed the asset side of the balance sheet as well as the liability side and discussed each in relation to the financial debacle which has swirled about us since August 2007. I will refrain from commenting on that but will offer some comments on his discussion of exit strategies.

One of the salient points to make here is that he began his discussion of exit strategies by noting that he and his colleagues believe that accommodative polices will be warranted for an extended period.

Here is the exact quote:

“My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.”

That is unambiguously clear and I do not think it allows any wiggle room for any interpretation other than the one which concludes that the funds rate will approach zero for a very long time.

He then discusses the methods which the FOMC can employ when it does choose to tighten.

He opened the discussion by noting that the Federal Reserve can pay interest on reserve balances and in so doing can establish a floor under the funds rate. He mentioned some of the successes which central banks in Europe have experienced with this tool.

He then moved to a discussion of reverse repo ( which in my day were known as matched sales). It is transaction in which dealers finance the Fed’s portfolio and when the dealers transfer money to the Fed that action drains reserves from the banking system which should cause the finds rate to rise.

It is an ancient tool and has been used quite effectively for years.

The Chairman then moved to a discussion of term deposits for banks. The Federal Reserve, in this instance, could take deposits from members for longer periods of time and pay interest on those deposits. For whatever period of time that the money remains at the Fed in the term facility it is sterile money which can not be lent.

Finally, the Federal Reserve can make outright sales of Treasury, GSE or mortgage securities which it holds in its portfolio.

Once again I think the point to note is that he began the conversation about exit strategy with the comment that it was unlikely to happen any time soon.

There should be, in my opinion, very little market impact from any of this discussion.

Comments

[TradingHelp...:]

“My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.”

...... so we can create rampant inflation that will take equities to ever new highs kidding investors and consumers alike that everything's fine and of course erode in real terms the burden of $11 trillion of government debt which we handily sold to the Chinese at a paltry interest rate.

Oct 09 08:53 AM

[markfl:]

What's amazing is how little clarity has come from the Fed recently. There's evidence of some discord based upon speeches given by Fed regional president's and FOMC members. Suddenly, however, it is as if they intended to retract their comments. This past week several statements suggested they are willing to tighten when the need arises, but that need won't be anytime soon--like maybe not at all next year.

The prospect of paying interest on bank reserves has been talked about for some time, so it seems this is under active consideration. Nevertheless, banks are still rather tight with lending policies, so it is not as if much coercion is required to get them not to propel money through economy. They already aren't doing it.

Oct 09 09:28 AM

[Tony Petroski:]

One of the salient points to make here is that he began his discussion of exit strategies by noting that he and his colleagues believe that accommodative polices will be warranted for an extended period.

Here is the exact quote:

“My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.”

Very droll Mr. Jansen.

This would have been better: "Chairman Bernanke presented pedestrian and pedantic proposals pending the pricing pens producing a pop."

Oct 09 09:49 AM

[JeffDB:]

Thanks for the executive summary, Mr. Jansen.

I don't think the message bodes well for our economy however.

It reminds me of a ship at sea that has been pretty severely damaged and drifting along as the crew tries to repair the damage and bail out the water, hopefully a little more quickly than it's coming in. This state of the ship message is saying we're still in pretty much the same shape we were in at the end of the storm.

Oct 09 10:10 AM

[Stepbear7:]

Accept This As The Truth The Whole Truth & Nothing But The Truth


You people still don't get it.
The Central banks along with the Federal Reserve, Fractional reserve banking procedures, and absence of the Gold standard are the spring boards of happiness for these cartel counterfeiters to rake the entire world over the coals and out of existence.
Federal Reserve Notes are near extinction. Rightfully so, because they(FRN) are worthless paper not soft enough for biological purposes and have no value without Gold standard backing it.
The rest of the world is starting to realize the USD (Federal Reserve Note) is the ROOT CAUSE OF PRESENT GLOBAL CHAOS.
Use the Gold Standard and get rid of Federal Reserve Notes and start having the U.S Government Treasury print United States Notes backed by gold reserves only producing allotments as needed to balance goods and services.

Abolish the Federal Reserve Act of 1913,Fractional Reserve Banking, the IRS, Ben Bernanke and the entire Federal Reserve System.
Then you will be able to understand and open your mind and eyes and move on to a better economic level of survival.
In other words remove 96 years of bend over vaseline jobs from the Federal Reserve System.
Just a thought ............. Have a good day,week,month,year and next decade.


Stephen

Oct 09 10:13 AM

[D. McHattie:]

With unemployment upwards of 10% it would be pretty hard to justify monetary tightening.

And the only way the unemployment rate will decline is when people have been out of work for so long that the government statistics no longer count them. Not good.

Oct 09 10:25 AM

[John Jansen:]

Tony,
I surrender my title as alliteration champion to you.

JJJ


On Oct 09 09:49 AM Tony Petroski wrote:

> One of the salient points to make here is that he began his discussion
> of exit strategies by noting that he and his colleagues believe that
> accommodative polices will be warranted for an extended period.<br/>
>
> Here is the exact quote:
>
> “My colleagues at the Federal Reserve and I believe that accommodative
> policies will likely be warranted for an extended period.”
>
> Very droll Mr. Jansen.
>
> This would have been better: "Chairman Bernanke presented pedestrian
> and pedantic proposals pending the pricing pens producing a pop."

Oct 09 11:53 AM

[TxTim:]

I think we should get ready to see QE2 in 2010, and it ain't a big boat.

Oct 09 12:41 PM

[Gary A:]

Just remember, when inflation occured previously, we were a creditor nation. Americans are broke now and cannot afford inflation. If the Fed or Geithner or Summers think they can they are idiots.

It is a different ball game than in the 70's. So they may be deathly afraid of inflation this time. If that is the case we will have a flat to deflationary economy for years, just like Japan.

Oct 09 01:29 PM

[ryanclarke:]

It's over. AS IN GAME OVER! The world has "defended" the dollar this week. What that means is the Asia-Pacific, European, and South American countries have chosen not to allow their currency to appreciate relative to the dollar. Bernake's game plan for the past year was simple ... keep the GREENSPAN inflation tactic working ... depress the 10 year T-Bill all the way to a 2% Yield or even better 1%, so all could draw more equity, (dare I say blood?), out of their homes ... and go out and shop and consume until they drop ... because Bernake is determined to save the banks and the Fed via reflating the housing market. Instead, the world turned around and spit the 10 year Treasury out of their respective central bank coffers, (dare I say, coffins?), and out onto the open market and soaked up the dollar bills into their reserve banks ... Bernake was so hoping they'd allow the dollar to get into their econonomies and jack up oil prices sky high ... not that the middle east or Russia or the Euro nations or Mexico could profit like GS from high oil prices. Now the open market is sitting on a bundle of 10 year U.S. treasuries which is why the yield on the 10 year leaped up today by roughly 100 basis points. Bernake's going to have to quietly buy those 10 year notes back ... or the inflation will be obvious ... until the Fed publishes the money balance ... which the Fed is required to do by law ... of their balance sheet ... showing an increase and not a decrease in money supply. So here is the final story. Everything the Fed has tried to do for the past year was a waste of time. The Fed has bought all the junk mortgage paper from every bank all over the globe. That's what's on the Fed's books. The Fed is also sitting on a ton of treasury bills that no one ... the whole world over ... wants to touch ... and the U.S. banks have tons of money cash. What to do Bernake? What to do? I SUGGEST HE TAKE THE CASH AWAY FROM THE U.S. BANKS AND GIVE THEM THE OVERPRICED BONDS so all the mortgage paper on the Fed's books can be wiped out ... dollar for dollar ... because if he doesn't do that ... THE DOLLAR WILL BE WORTHLESS !!!!!!!!!!!!!!!!!!!

Oct 09 05:14 PM

[buddhabill:]

Where is the 1.5 TRILLION in new debt for next year, not to mention the roll-over of existing debt gonna come from?

Oct 09 06:26 PM

[wcrxlp edit...:]

"Unambiguously clear" and "I do not think it allows any wiggle room for any interpretation?"

What?

Ben Bernanke is a June Taylor dancer compared to past Fed chairmen.

"My colleagues at the Federal Researve and I believe that accommodative policies..." This is unambiguous?

"Will likely be warranted..." No wiggle there.

"For an extended period of time." You can bank on that.

Mark your calendars with that deadline.

Oct 10 08:36 AM

[John Bowman:]

When I hear Bernanke speak, I get this warm and fuzzy feeling inside.

A few minutes later, I have my head in the toilet.

Oct 10 09:26 AM

[dmintman:]

I think his smile says it all!!!!

Oct 10 09:54 AM

[Bolton Peck:]

In laymen's terms: We'll just keep kissing the bank's asses for an indefinite period..

There are a lot of great ideas floating around on this site, it's too bad most of them won't get put into play. This financial sector team will be the undoing of the Obama administration. That's too bad because I like him and what he's doing in a lot of other areas.

Oct 10 11:05 AM

[Andre Setiawan:]

Well, no matter what the critics say about the Federal Reserve, in the end the decision is in the hands of Bernanke and Co. whether we like it or not. So far however, there's no significant jump in CPI, although some said that the data are not accurate but that's the data that has been used by the Federal Reserve for years so that's the data that we should watch as well. Unless something like in Australia comes up in the US, then there's no way the Fed will suddenly start the tightening cycle. The Bank of England is usually more conservative in this kind of matter and they also don't seem to be giving out any signs that interest rates will be raised soon.

Oct 10 02:53 PM

[Northstar10000:]

Wake up---
The Fed can only control short rates and only until the market forces
them to raise rates. If you look carefully at the stats on rates and see where and when the fed moved you will find that they actually control what the market allows them to control. the markets will force rates higher after the year end stock market implosion. Short term he has until about Feb of 2010 after that the markets will force his hand.
Enjoy a nice year end plunge in stock prices that no one is looking for. Everyone thinks after a short pull back it moves higher into year end. sounds like the ship of fools is loaded all to one side.

Oct 10 06:26 PM

[yank:]

Peck:
You said you actually like what Obama is doing. What's to like? They guy is an overconfident, inexperienced narcissist. Is that what you want in your President? I sure as hell don't.

Yank


On Oct 10 11:05 AM Bolton Peck wrote:

> In laymen's terms: We'll just keep kissing the bank's asses for an
> indefinite period..
>
> There are a lot of great ideas floating around on this site, it's
> too bad most of them won't get put into play. This financial sector
> team will be the undoing of the Obama administration. That's too
> bad because I like him and what he's doing in a lot of other areas.

Oct 12 11:08 AM